The Ministry of Corporate Affairs (MCA) vide its circular dated 21 August 2019 (Ref: General Circular No. 09/2019 available at http://www.mca.gov.in/Ministry/pdf/GeneralCircular_21082019.pdf) (General Circular) clarified that appointed date as contemplated under Section 232(6) of the Companies Act 2013 (Act) can either be a specific calendar date or a date based on the trigger of a specific event.
A scheme of arrangement (Scheme) approved between or among companies is required to comply with the provisions of sections 230-232 of the Act.
Section 232(6) of the Act requires a Scheme filed under sections 230-232 of the Act to:
“…..clearly indicate an appointed date from which it shall be effective and the scheme shall be deemed to be effective from such date and not at a date subsequent to the appointed date”
Section 232(3) of the Act requires the National Company Law Tribunal (NCLT) to not sanction any Scheme unless a certificate by the company’s auditor has been filed with the NCLT stating that the accounting treatment, if any, proposed in the Scheme is in conformity with the accounting standards prescribed under section 133 of the Act.
The Ministry of Corporate Affairs vide its circular dated 16 February 2015 notified Indian Accounting Standards (Ind AS). Ind AS 103 (which deals with ‘Business Combinations’) provides that for transactions which are not under common control, the accounting is to be done from the ‘acquisition date’.
Ind AS 103 provides guidance on what the acquisition date will be. It states that “the acquirer shall identify the acquisition date, which is the date on which it obtains control of the acquiree.”
The acquirer usually obtains control of the acquiree upon completion of all the conditions precedent mentioned in the transaction document (which document in an arrangement under sections 230-232 of the Act, is the Scheme).
As on the date of approval of the Scheme by the board of directors of such companies undergoing the Scheme, it was impossible for them to predict the exact date on which all the conditions precedent would get completed. Accordingly, to comply with the provisions of Section 232(6) of the Act as well as Ind AS 103 as notified under Section 133 of the Act, companies have been defining the ‘appointed date’ to mean the ‘effective date’. This was palatable to the auditors as well, who confirmed that the accounting treatment stated in the Scheme (in which the ‘appointed date’ has been defined to mean the ‘effective date’) is in accordance with applicable laws.
However, subsequently, once the matter was before the NCLT and the Regional Director (representing the Central Government), certain benches as well as officers took a divergent view and stated that section 232(6) requires a specific calendar date and objected to such definition of the appointed date.
The clarification was necessary to align the aforesaid divergent views and interpretations expressed by certain benches of the NCLT as also the Regional Directors. The General Circular puts to rest the belief that the aforesaid section made it mandatory for a Scheme to provide a specific calendar date and the same cannot be based on the trigger of a specific event.
The MCA in the aforesaid General Circular relying upon judgment of the Supreme Court in the case of Marshall Sons & Co. India Ltd. v ITO [223 ITR 809] and the judgement of the Madras High Court in the case of In Re: Equitas Finance Limited & Ors. [136CLA48(Mad)], has put to rest the dichotomy created on account of conflicting views taken on two sub sections of section 232 of the Act, namely 232(3) and 232(6).
MCA has issued the following clarifications:
The General Circular is a welcome clarification from the MCA. It clarifies that the appointed date can be tied to the occurrence of an event. It reiterates the settled principles of law under various judicial pronouncements by Indian courts that a Scheme is a commercial contract between the companies involved, their shareholders and the creditors and the courts would not act as a court of appeal and sit in judgment over the commercial wisdom of the concerned parties to the arrangement. Thus, the General Circular will ensure much needed uniformity and consistency of interpretation in sanctioning of Schemes.
- Mehul Shah (Partner), Sanket Shah (Principal Associate) and Aman Yagnik (Senior Associate)
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